Feds greenlight new employee health insurance option: ICHRAs

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You’ve just been handed an alternative way to afford employee health insurance: Let them buy it themselves.

It’s OK by the feds. In fact, IRS recently sanctioned a new employer-sponsored vehicle to help them do just that.

The Departments of Health and Human Services, Labor and Treasury have announced that employers that don’t offer group health insurance coverage can fund a new type of health reimbursement arrangement (HRA).

Here’s the scoop.

Effective Jan. 1, 2020

The new vehicle is known as an individual coverage HRA (ICHRA).

Effective Jan. 1, 2020, your employees can use ICHRAs to buy individual-market insurance. That includes public exchanges under the Affordable Care Act.

This is a complete about face from IRS Notice 2013-54, which specifically prevented employers from offering a standalone HRA for this purpose in the Obama-era.

It doesn’t matter what your company size – all employers are eligible.

And the feds think many of your peers will take advantage. They’re estimating some 800,000 employers will offer these HRAs as a way to pay for health insurance.

As you determine whether you might be one of those employers, here are some specifics about how you’d need to structure the plan.

Structuring your plan

Your company will need to determine how it will structure employee eligibility in your ICHRA. And you’re limited to 11 classes:

  • Full-time employees
  • Part-time employees
  • Salaried employees
  • Hourly employees
  • Seasonal employees
  • Temporary employees who work for a staffing firm
  • Employees covered under a collective bargaining agreement
  • Employees in a waiting period
  • Foreign employees who work abroad
  • Employees in different locations, based on rating areas
  • A combination of two or more of the above.

Once you determine who’s going to be eligible, you’ll select a monthly allowance of tax-free money to make available to employees – the maximum amount you’ll reimburse.

Note: You’re not bound by any minimum contribution requirements or maximum contribution limits. Not only that, but you can offer different amounts to different employees based on a number of different factors from the classes listed, age and family size.

And what can you reimburse for? You can choose to set your own limits for your company if you wish; otherwise employees can be reimbursed for anything listed in listed in IRS Publication 502. As long as employees submit proof of the expense and that they have health coverage you can make tax-free reimbursements.

The possible downsides

Of course it’s not a slam dunk. There are some things you’ll want to be aware of, according to the folks at PeopleKeep:

  • ICHRAs are complicated to administer. There’s a ton to keep track of, so you may want to enlist the help of a specific administrator.
  • It could be a tough sell. 2020 is the first year you can make these available, which means it may be a bit of an uphill battle to get employees on board, since many may not have even heard of them. You’ll need to do an educational blitz.
  • Employees will have to make a difficult choice. Folks can’t simultaneously participate in a ICHRA and collect premium tax credits, So they’ll have to choose between the two.